How to fix what the Banking Royal Commission has found is broken

While most Australians have been shocked by the dodgy, crooked and corrupt practices that have been revealed by the Banking Royal Commission, there is a widespread view that after a bit of “tough talk” and window dressing by the “Banker Buddies” in the Turnbull government, nothing much will change and we still have an economy dominated by private banks and their minions, eager to stuff as much debt as possible into every household across the nation using whatever means they can get away with.

After all, Scott Morrison, Malcolm Turnbull, Kelly O’Dwyer etc made it perfectly clear for over 2 years that they thought having a Royal Commission into the banks was a complete waste of time.

According to them, everything was fine and their tough ‘cops on the beat’ – APRA, ASIC and the RBA were doing a super job and keeping the banking industry as white as the driven snow.

Plus we know that it has been Liberal Party policy for over 20 years to drive the Australian economy on constantly expanding levels of household debt. The graph below shows that almost all of the growth in household debt as a percentage of GDP since the early 1980s, took place under the Liberal governments of John Howard, Tony Abbott and Malcolm Turnbull.

No wonder they are all close buddies with private bankers as exploding levels of household debt has meant exploding profits for private banks.

Letting the private banks stuff Australian households with debt as though they are foie gras geese (see video below) is what John Howard, Peter Costello, Malcolm Turnbull and Scott Morrison call ‘responsible economic management’.

To make matters worse the ALP has been, until recently, largely missing in action and has failed to alert the Australian public to the long term damage the Liberal Party have been doing to the Australian economy.

Is there an alternative?

How do we fix something that is this broken and corrupt?

How do we move back to a national economic model that relies on productive economic activity rather than debt driven speculation on increases in the prices of existing housing assets?

Can we detox an economy that has become so hopelessly addicted to household debt and residential housing asset price speculation that every arm of government policy has been bent and corrupted to keeping the ‘addict’ hooked?

Pressure the regulators to do nothing – have ‘cops on the beat’ in a coma

Insufficiently fund regulators

Encourage regulators to go with ‘soft’ options rather than a ‘big stick’

Appoint people to the regulators that ‘support’ out of control credit creation (“..let the free market decide..”) and be expected to do very little, very slowly to chase shonks and crooks.

Deregulate how and when private bank credit can be created by the private banks

Cut the taxes on capital gains on assets prices pumped up on a torrent of debt

Encourage and support rising housing prices with first home grants and other incentives for households to take on massive debt and join the ‘bubble’.

Allow the banks to use effect taxpayer guarantees to source the cheapest possible capital from around the globe to support their credit creation operations

Make it clear that there is an implicit taxpayer guarantee for the private banks credit creation operations

Yes, we can and the solution is much easier than most realise.

One of the ploys of the Banking industry and their compliant minions throughout politics, the press and economic commentators is to run scare campaigns that make the idea of any change sound impossible.

Essentially they are trying to hold the Australian people hostage. Their argument is that if we try to take away their profits and privileges they will pull the economy down around our ears and make all of us suffer.

What is the alternative

The alternative is straight forward and simply a combination of (a) replacing private bank credit as public money in the economy and (b) adopting policies that encourage productive investment and economic activity and discourage unproductive speculation or #FakeInvestment.

(a) Replacing the role of private bank credit as money in the economy

Click here for a more detailed discussion of how we replace private bank credit as public money in the economy. Private Bank credit as public money is a relic of 19th century economics that it is long past its use by date. Relying on private bank credit as public money is the reason we have a massive bubble in household debt and residential house prices in Australia. Fixing both of those problems requires dealing with the dysfunction inherent in relying on private bank credit as an effective form of public money.

(b) Encouraging productive investment and economic activity

This is simply a matter of encouraging the allocation of economic resources including human labour towards industries that are productive and involve an expansion in economic capacity.

As the productive parts of the economy are encouraged and expand, their demand for resources will result in a natural withering of the unproductive and speculative parts of the economy. The speculative and unproductive parts of the economy will simply dry and die on the vine as they are crowded out by healthy economic activity.

This does not require any complicated policies or having public servants ‘picking winners’.

For the most part it simply involves reducing and eventually eradicating all of the subsidies, lurks and perks that have encouraged the tumour like expansion of the speculative and unproductive parts of the economy.

Sadly one of the worst features of economic policy over the last 30-40 years was the growing flow of subsidies, tax benefits and other encouragements offered to activities that were little more than clever speculations on the prices of existing assets.

The following are some examples of how to encourage productive ‘real’ investment and discourage unproductive speculation or #FakeInvestment.

The Tariff on Australian production due to unproductive capital inflows

The first and most important action is to remove the effective tariff on Australian production that arises when our trade partners use unproductive capital flows to drive the Australian dollar above what it should be having regard to our trade performance.

Our trade partners have been manipulating exchange rates on a massive scale since the GFC by the adoption of zero interest rate policies. Zero rate interest rate policies have the effect of driving capital from their economies into the economies of their trading partners and in doing so driving up the exchange rates of their trade partners. They have been using their domestic monetary policy to effectively impose a tariff on Australian production.

Defending Australia against these predatory trade policies is not difficult but it does involve regulating capital inflows that are clearly unproductive. Or to put it another way – regulating capital inflows that cannot clearly demonstrate that they are productive. For a detailed discussion of unproductive capital inflows and how to regulate them click here

Removing this massive effective tariff on Australian production is essential and would represent a massive encouragement of productive investment and economic activity and discouragement of speculation aka #FakeInvestment.

It is disappointing that Ross Gittins writing in the Sydney Morning Herald yesterday spent a whole column arguing against trade tariffs but completely ignored the effective tariff on Australian production that our trade partners are imposing through unproductive capital inflows to Australia.

Restricting tax deductions and benefits to real productive investment

One of the worst examples of a public policy that encourages speculation and #FakeInvestment rather than productive investment is the extension of a capital gains tax discount regime to speculation on the price of existing residential housing assets.

While there may be a good case for encouraging investment in new housing stock by offering those who invest in new housing stock additional tax benefits or discounts on capital gains, there is no justification for offering these benefits to people who merely acquire title to existing housing assets.

They have created no new economic capacity so why offer them any tax benefit or encouragement at all? If they did not acquire the existing housing asset someone else would own it and either rent it out or live in it themselves.

At the very least there should be a significant distinction drawn in all tax laws between investment in productive new economic capacity and mere acquisition of title to assets and speculation in a rise in their price.

Considering that much of this unproductive speculation and #FakeInvestment in residential asset price values has been enabled by unproductive capital inflows secured by our private banks with a taxpayer guarantee, there is clear connection between the massive misallocation of resources involved in creating a massive landlord class with foreign debt and external liabilities of our banking sector and an inflated exchange rate that penalises local productive economic activity.

Encourage productive economic activity by reducing the subsidies, tax benefits and support for unproductive speculation and #FakeInvestment

Fixing the stuff that the Royal Commission has identified as fundamentally corrupted and broken is not difficult even though the banking industry and their political buddies will claim it is an impossible task.

It simply requires identifying the distinction between real productive investment and unproductive speculation and offering no encouragement or advantage to unproductive speculation and preferably regulation to actively discourage it.

While in some areas there may be a case for some proactive policy encouragement for real productive investment it is likely that once the policy support for unproductive speculation or #FakeInvestment is removed there will be plenty of economic resources (including some our most capable and talented young people) available for much more productive economic activity than we currently think possible.

We simply cannot afford to continue to divert the nature wealth of Australia to unproductive speculation and #FakeInvesment.

The sooner the Liberal Party abandon this ideology of dissolution and decay the better we will all be.

The sooner the ALP, Greens, National Party and Independents take a firm stand against it and unrelentingly draw it to the attention of the public to it the sooner they will find themselves in government and leading the nation forwards.

Those Bankers have been exceeding even the Glass Pyramids low expectations.

Having said that unless the ALP, Greens and the Nats and independents decide to really demand root and branch reform of the role of banks in our monetary model and the regulators, it is likely to fade away with a bunch of band-aides and other temporary fixes.

Well there’s no other plan apart from continuing to blow an asset bubble so nobody will do anything at the risk of being held responsible if there’s a sudden reversal of fortunes – I don’t think any incoming Labor government would be brave enough to attempt real reform either, the banks are just to pervasive and powerful. But really when you think about it there’s no reason why Australians should have the most expensive real estate in the world apart from the fact that its been purposely engineered that way as a policy outcome… affordable housing should be a right for ordinary Australians, even in Sydney and Melbourne. Even Menzies understood the need to enfranchise the working class though home-ownership – now-days the Liberals don’t seem to give a damn that they’ve excluded an entire generation.

Absolutely no reason at all.
The core of the issue, in my opinion, is that by effectively privatising public money by giving effective ‘public’ money status to private bank credit, we have locked ourselves into the mechanics of private bank credit creation.
When private bank credit creation is deregulated or specifically encouraged to be directed to existing housing, an asset price ponzi is inevitable as that is now the central mode for getting ‘public’ money out into the economy.

The situation is made worse when people insist on balanced fiscal budgets as a balanced budget simply means the government refuses to exercise its public money creation power. In other words effectively cede that power to private banks and the credit they create. Sure the government has influence in terms of spending priorities within a balanced budget but why surrender money creation to private profit making banks AND deregulating how they use that power. This is such policy insanity that it must come to an end sooner than later.

Fixing the problem without ‘crashing’ the economy is not difficult. It firstly requires regulating private bank credit creation so it is directed to productive purposes. This may mean no more than limiting its application to some key unproductive purposes like mortgages secured by existing property.

In addition the government should run a modest directly financed ‘created’ deficit by cutting taxes on lower income earners. That gets money out and circulating.
More Productive private bank credit creation and more public money created by the government (via lower taxes) should provide a less painful way of allowing a transition away from housing asset ponzinomics.
Yes, Menzies would be rolling in his gravehttps://theglass-pyramid.com/2016/04/25/malcolm-forgets-menzies-concept-of-home/